Cle Elum declares bankruptcy over $26M debt

SEATTLE – The city of Cle Elum, Washington, filed for bankruptcy Tuesday after failing to reach a deal with a developer over a $26 million debt stemming from a legal dispute over a long-delayed housing project.

In a declaration with the U.S. Bankruptcy Court for the Eastern District of Washington, Cle Elum Mayor Matthew Lundh wrote that the city is “insolvent” under the bankruptcy code, citing the debt owed to the developer, City Heights Holdings.

The city had “negotiated in good faith” and made its “best offer given limited resources” but ultimately could not reach a deal to repay the debt, Lundh wrote. Meanwhile, the developer’s lender recently filed garnishments to seize funds in city bank accounts.

“Any further negotiations” with City Heights are “impracticable,” Lundh wrote, “because (the developer) has garnished necessary City funds, and the City already has limited funds with which to continue City services” while also defending itself in the dispute.

The filing earns Cle Elum the dubious distinction of becoming only the second municipality in Washington to seek bankruptcy protection.

“We did not make this decision lightly,” Lundh said in a statement after the filing, saying it was necessary to protect “residents, essential services and our financial future.”

The Cle Elum City Council unanimously authorized the bankruptcy at a special meeting Monday night after previously raising the prospect late last year.

“This is not the best option. It is not a good option. It is potentially the last option we have left,” said Cassidy Buechle-Curtis, a Cle Elum City Council member, at the meeting.

The Kittitas County town, a popular recreation destination about 80 miles east of Seattle along Interstate 90, had been pushed to the brink of bankruptcy over City Heights’ plans to build more than 950 homes in the hills north of downtown.

An arbitrator ruled in November that Cle Elum had breached its “duties of good faith and fair dealing” by repeatedly violating an agreement, originally signed in 2011, that pledged cooperation with the development, dubbed Ederra.

Instead of abiding by the deal, the arbitrator, retired King County Superior Court Judge Paris Kallas, found that the city had repeatedly slow-walked permits and attempted to throw up new obstacles.

Kallas ordered the city to pay City Heights more than $22 million, plus 12% interest per year, and later tacked on another $2.3 million in legal costs. The total debt stands at about $26 million, according to City Heights.

That’s a giant IOU for the Cascade Mountains town of about 2,300, with 29 city employees, a volunteer fire department and a general-fund budget of about $5 million.

Once known mainly as a fueling stopover for people driving over the mountain passes – with signs advertising its “Easy Through Access” – Cle Elum and the surrounding area have more recently become fast-growing and desirable outer-ring bedroom communities for Seattle and its suburbs.

In the months since the arbitration award, Cle Elum officials and Sean Northrop, the head of City Heights, have traded public jabs, but also tried to work out a settlement.

Northrop had repeatedly said he wanted to find a way for the city to avoid bankruptcy while satisfying its debt. “Bankruptcy is a failure option. It’s terrible for the city,” he said in an interview earlier this year.

In recent weeks, Northrop and city representatives had met in all-day sessions aided by a professional mediator. But the talks collapsed.

Pressure on the city ratcheted up in recent weeks after Copper Leaf, a lender for the City Heights project, filed legal notices to garnish three city bank accounts for about $700,000.

At a council meeting this month, Rodger May, a longtime Pacific Northwest entrepreneur and sometimes Hollywood producer who owns Copper Leaf, said he’d decided it was time to collect on the debt.

“I don’t know of a single institution that would allow a loan like this go into default for several years,” May said at the time. “We are not in a position where we can wait anymore.”

May warned the council that a negotiated deal was preferable to filing for bankruptcy. “Who wants to invest in a bankrupt city with the people who put it into bankruptcy?” he said.

John Kaplan, a bankruptcy lawyer hired by Cle Elum, responded at the meeting, saying the garnishments filed by Copper Leaf were threatening the city payroll as well as city vendors “who have checks that may or may not clear.”

Kaplan said the garnishment notices arrived even as the city had been negotiating in good faith on a possible deal.

But Northrop said the garnishments were no surprise, and shared a copy of an email that had been sent to city officials telling them last month that such collection action would be taken unless it started making substantial payments soon.

In a statement Tuesday, City Heights said it had accepted “significant concessions” in negotiations with Cle Elum, including “multimillion-dollar reductions and a decades-long payment plan – specifically designed to fit the City’s current financial capacity.”

The negotiations had produced “substantial agreement,” and the mediator last week circulated what City Heights said was a potential final deal. “Three days later, without further contact or negotiation, the City voted to pursue Chapter 9 bankruptcy” with “no explanation,” the statement said.

In its initial bankruptcy filing, City Heights was listed as Cle Elum’s biggest unsecured creditor. The city also listed other six-figure debts, including a $525,000 legal dispute with a local business owner.

Municipal bankruptcies are extremely rare in the U.S. The only other such case in Washington came in 1991, when North Bonneville, Skamania County, filed for bankruptcy after a dispute with the U.S. Army Corps of Engineers left it $365,000 in debt.

Unlike a personal bankruptcy, municipal bankruptcies under Chapter 9 of the U.S. Bankruptcy Code, first enacted during the Great Depression, don’t allow cities to wipe away debts or require selling off assets to pay creditors. They do allow courts to approve payment plans that stretch out debt-payment deadlines and potentially reduce the amount owed.

A 2020 Pew Center analysis of municipal bankruptcies warned they can cause “long-term damage” to a town or city’s reputation and “commonly result in increased taxes, higher fees for services, reduced benefits for workers … and elevated future borrowing costs.”

It was not immediately clear what impact the bankruptcy will have on Cle Elum residents. In a news release, the city said it won’t erase the debt but would allow for a more “sustainable resolution” that will protect services.

In an interview Tuesday, Steve Harper, a Cle Elum City Council member, said the city is already run “on a shoestring” and predicted a bankruptcy court could approve payment terms that will be more desirable than any deal that could have been reached with City Heights.

“There is no fluff,” he said. “… There is no secret fund.”